LONDON: The euro hit 16-month lows against the dollar and sterling on Friday and hovered near an 11-year low versus the yen, with further declines expected as worries grow about a worsening euro zone debt crisis and sovereign funding pressures.
Next week's Italian and Spanish government bond sales are seen as the year's first big tests of fragile euro zone countries' abilities to raise funds and are likely to keep the market on edge and the euro under pressure.
US jobs data due at 1330 GMT could provide some optimism on the outlook for the US economy after a measure of private-sector hiring surged in December. They are expected to show a rise of 150,000, but many think the figure may be higher.
Strong US jobs data could help risk sentiment but many analysts expect this may weigh further on the euro versus the dollar as investors focus on the divergence between the two economies, with the euro zone seen heading towards recession.
The euro was up 0.2 percent versus the dollar at $1.2805, recovering from an earlier low of $1.2763 hit on trading platform EBS, its weakest since September 2010, with traders saying stop loss orders were triggered on the break of $1.2800. But it remained vulnerable to further bouts of selling.
"There is a general tendency to sell the euro on any rallies," said Ankita Dudani, currency strategist at RBS.
"Even if we get a strong non-farm payrolls print it would be supportive for risk sentiment but not so for euro/dollar".
The only respite the euro is expected to gain would be from short-covering, as market participants take profit on short euro positions which have reached record high levels.
The euro's drop helped buoy the dollar to 81.062 against a basket of currencies, its strongest in a year. The dollar index was last at 80.903.
The single currency also hit a 16-month low versus sterling of 82.39 pence, while against the yen it was at 98.75 yen, close to Thursday's 11-year low of 98.451 yen.
As well as next week's debt auctions, the market will await a meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel on Monday for fresh hints on steps they may take to try to resolve the crisis.
Investors are sceptical, however, that they will announce anything to allay the market's fears about the troubles facing the euro zone, leaving the euro under continued pressure.
The talks will centre on new rules to enforce budget discipline across the European Union. There are concerns a new treaty would take some time to finalise, just as credit rating agencies assess whether to downgrade some euro zone countries.
"Both European real money investors and hedge funds were selling (the euro) in pretty large amounts," said a trader for a Japanese brokerage house in Tokyo.
"In the near-term the euro may target $1.25 and after that $1.20, that is now sort of the market consensus," he said, adding that the market may target option barriers at $1.2750, $1.2700 and $1.2650, as well as a large barrier at 98.00 yen.
On technical charts, one support area for the euro is seen around $1.2600, the 76.4 percent retracement of the June 2010 to May 2011 rally.
Investors are particularly concerned about the borrowing costs of Italy, which must pay out 100 billion euros in bond coupons and redemptions in the first four months of 2012 alone.
Ahead of his meeting with Merkel next week, France's Sarkozy is due to meet Italian Prime Minister Mario Monti later on Friday.
The dollar edged down 0.1 percent against the yen to 77.12 yen, pulling away from a two-month low of 76.30 yen hit earlier this week.